Thursday, August 02, 2018

BWorld 236, Two years of Duterte energy policies

* This is my column in BusinessWorld on July 26, 2018.

For the past two years, the Duterte administration has produced a mix of bad and good policies from the perspective of market-oriented reforms envisioned in the EPIRA law of 2001.

Four recent stories in BusinessWorld would serve as jump-off points of this assessment:

1. Finance dep’t studying carbon-emissions tax (July 20).
2. Flawed DoE assumption results in baseload bloat (July 16) By Roberto Verzola.
3. More flaws in the DoE plan raise baseload bloat to 103% (July 23) By Roberto Verzola.
4. Our looming electricity shortage (July 23) By Ramon L. Clarete.

From #1: DoF Usec Karl Chua said “such taxes are in force in places like the UK, where the tax on diesel represents about 70-80% of the fuel’s retail price. In the Philippines, the tax is equivalent to 5% of retail.”

From #2: “This baseload bloat will lead to stranded assets in the future because those recently constructed coal and nuclear plants will be unable to sell half of their output.”

From #3: “Steadily dropping solar prices will make market-driven solar penetration inevitable. The rising solar share in the capacity mix will initially displace peaking and midrange flexible plants.”

From #4: “Currently, power reserves are at their lowest level, which is 10% of peak demand. The level used to be twice that but even at the higher level, reserves are even lower compared to those in neighboring countries… the prices of coal and petroleum are high… There is big appetite of private investors to invest in LNG-related infrastructure.”

First of all, adding a new “carbon emissions tax” will further distort the energy market because the higher energy taxation under TRAIN law is already wrong. The tax hikes in oil, LPG, and coal have significantly contributed to the country’s current high inflation rate. And that’s just the first round.

The second and third round of the tax increases will be imposed on January 2019 and January 2020, respectively.

Second, there is no “baseload bloat” as claimed by Verzola. The Philippines actually has a “baseload lack” so the current DoE approval of adding more coal plants to the grid is a good policy.

Philippine coal use of only 13 million tons oil equivalent (mtoe) in 2017 is small compared to our neighbors. Malaysia with a population less than 1/3 of the Philippines has coal consumption of 20 mtoe, Vietnam has more than 2x with 28 mtoe, South Korea with one-half of the Philippines’ population has uses coal seven times more than we do, on top of having substantial nuclear power capacity.

Thus, there will never be coal “stranded assets in the future,” even for countries with plans to shift away from coal like South Korea and Japan.

From 2010 to 2017, South Korea’s coal use increased from 76 to 86 mtoe while Japan’s increased from 116 to 121 mtoe over the same period.

Three, “steadily dropping solar prices” have not resulted in cheaper solar energy as evidenced by the continued rise in feed-in-tariff (FIT) rates per kWh for solar 1st batch (granted in 2015): P9.68 in 2015, 9.91 in 2016, P10.26 in 2017, 10.68 in 2018, or 2x the average WESM prices of P5+/kWh in first half of 2018. So the Duterte/DoE policy of not adding more MW capacity for expensive solar-wind energy is good.

Four, Dr. Clarete’s observation on limited reserves is correct and further contradicts the assertion of Mr. Verzola. But Clarete’s “prices of coal and petroleum are high” is not true all the time, prices go up and down and up and hence, are generally temporary. For instance, coal Asian Marker Price (AMP) was $125/ton in 2011 and down to half in 2015, and then rose again to nearly $100/ton in 2017 (see table).

Inviting private investments, not government, in LNG terminal is a welcome development. DoE should shy away from committing huge taxpayers’ money to develop expensive infrastructure for private power players.

Five, not in recent news but the transition of WESM operation to an Independent Market Operator (IMO) has materialized under the current administration, 17 years after the EPIRA law, a milestone.

I have attended the official announcement by DoE Sec. Cusi last June 25, 2018 at Crowne Plaza Galleria where Atty. Saturnino Juan has been elected as the first President of IMO.

Six, continued bottlenecks in electricity transmission continues until today and this is bad news.

During the Energy Policy and Development Program (EPDP) book launching and sort of “farewell lecture” last week July 19 at the UP School of Statistics, the problem of transmission bottlenecks was among the issues discussed.

As a result, even if investors put up several power plants, their electricity output will never reach the distribution utilities and end-users because of the lack of transmission lines.

As I mentioned earlier, two years under the Duterte administration has resulted in both good and bad energy policies for the country.

We should continue to support the first and rectify the second.

See also:

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